LEGAL RULING NO. 375

CALIFORNIA
FRANCHISE TAX BOARD
Legal Ruling No. 375

June
11, 1974

TAX CREDIT FOR ACCUMULATED
DISTRIBUTIONS MADE BY A NONRESIDENT TRUST TO RESIDENT BENEFICIARIES

The
taxpayers herein were contingent beneficiaries of a Minnesota trust that was formed
in 1946. They became California residents in 1963. In 1972 the trust made an accumulated
distribution to the taxpayers which became taxable to them under section 17745(d):
". . . ratably in the year of distribution and five preceding taxable years."
The trust did not file a California tax return under Section 17742 in any of the
years of accumulation, 1963 to 1972.

The taxpayers are claiming
a tax credit under Section 18805 for Minnesota income tax paid by the trust for
1963 to 1971, inclusive.

The following questions are presented:

(1)
Are the taxpayers entitled to credit against California income taxes for taxes
paid to Minnesota by a trust of which they are beneficiaries?

(2)
To what extent is this credit allowable?

Decision

(1)
Yes.

(2) That credit that would have been allowed if the
trust income had been distributed to the taxpayers ratably (equally) in the year
of distribution and the five preceding years.

Discussion:

(1)
Section 18005 of the Revenue and Taxation Code provides:

A resident beneficiary of an estate or trust who is taxable on the income of
the estate or trust under Chapter 9 of this part shall, subject to the following
conditions, be allowed a credit against the taxes imposed by this part on such
income for net income taxes paid by the estate or trust to another state on such
income:

(a) Credit shall be allowed only for such proportion of the tax
paid to the other state by the estate or trust as the income of the estate or
trust which is taxable to the beneficiary under this part and also taxed to the
estate or trust in the other state bears to the entire income of the estate or
trust upon which the taxes paid to the other state were imposed.

(b) The
credit shall not exceed such proportion of the tax payable under this part as
the income of the estate or trust which is taxable to the beneficiary under this
part and also taxed to the estate or trust in the other state bears to the beneficiary's
entire income upon which the tax is imposed by this part.

Section
18001 of the Revenue and Taxation Code provides in part:

Subject to the following conditions, residents shall be allowed a credit against
the taxes imposed by this part for net income taxes imposed by and paid to another
state on income taxable under this part:

(b) The credit shall not be allowed
if the other state allows residents of this state a credit against the taxes imposed
by that state for taxes paid or payable under this part.

No
provision has been found under Minnesota Income Tax Law which would allow the
taxpayers a credit against taxes imposed by Minnesota for taxes payable to California.
Therefore, the taxpayers should be allowed a credit against California income
taxes for taxes paid to Minnesota by the trust.

(2) When,
as in the instant determination, there has been an accumulated distribution of
trust income, the applicable statute is Section 17745(d), which provides:

The tax attributable to the inclusion of such income in the gross income of
such beneficiary for the year such income is distributed or distributable under
subdivision (b) shall be the aggregate of the taxes which would have been attributable
to such income had it been included in the gross income of such beneficiary ratably
for the year of distribution and the five preceding taxable years, or for the
period that the trust accumulated or acquired income for such contingent beneficiary,
whichever period is the shorter.

Therefore,
subject to the limitation set forth in Section 18005(b), the credit shall
be based upon the tax on the income accumulated by the trust since the taxpayers
became California residents until the date of distribution. One-sixth of that
amount shall be added to the taxpayers' income for the year of distribution and
for each of the five preceding years to determine the California tax attributable
to the trust income. The credit shall be computed for each year and the total
allowed in the year of distribution.